Why Corporate Leaders Love Trump Tax Cuts

Corporate executives are very excited about President Trump’s proposed tax cuts on corporate profits. Since dozens of S&P 500 companies now use loopholes to pay no taxes, it isn’t obvious why this is a pressing issue, so we should dig into this a little deeper.

Before 1982, corporations were barred from buying their own stock because it is an obvious way to manipulate the stock price and disguise the health of the company. As part of the move toward a free market economy, the Reagan administration removed that regulation. Since then, corporations have regularly bought huge amounts of their own stock.

As part of the housing bubble in the 2003-2008 period, corporations were the largest net buyers of stock, purchasing about $190 billion in stocks in 2004, $320 billion in 2005, and over $600 billion in 2007 as the bubble began collapsing. The same thing happened after the Financial Crisis, with corporations buying their own stocks to the tune of $260 billion in 2010 and rising to a peak of more than $600 billion in 2015.

When corporations buy their own stock, it means there are fewer shares in the hands of stockholders. Thus, when profits are announced, the amount of profit per share goes up, even if the total profit is no larger. This is known as boosting earnings per share (EPS) and usually encourages buying that raises the price per share. Not so coincidentally, these are the two metrics that usually trigger lucrative executive bonuses.

How lucrative are these bonuses? In 2012, the 500 highest paid executives in U.S. public corporations earned an average of $30.3 million each for the year. Forty-two percent of that compensation came from stock options and 41% from stock awards. Of course, these executives are the individuals who make decisions about whether their company should buy back company stock – a blatant conflict of interest.

In addition to fueling inequality, with the top 0.1% of individuals collecting 11.3% of all income in the U.S. (still slightly behind the 12.3% they took in 2007) this phenomena actually holds back economic growth as well. The 449 companies in the S&P 500 during the period 2003 through 2012 spent 54% of their profits on buying back their own stock. Another 37% was spent on dividends for stock holders.

With 91% of their profits spent buying stock and giving out dividends, companies had very little money left to invest in research, or in new machines, computers, and buildings, or for employee pay increases. Stockholders and top executives had cash to spend on luxury condos in coastal U.S. cities, $75,000 energy-efficient automobiles, vacations on far-away beaches, and hedge fund investments on global currencies, but economic growth lagged at around 2% and wages for the 99% have barely grown.

The Trump tax cuts would provide corporations with a new shot of money for stock purchases, dividends, and executive bonuses. This sorry situation highlights why our entire political economy must be re-engineered to create a decent standard of living for all of us. These are political decisions; decisions about what values are really important and which are not.

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